Local governments in Minnesota overcharged new homeowners $78 million in the last five years in permit fees, according to a Housing Affordability Institute study.
State law requires these fees to be “fair, reasonable, and proportionate to the actual cost of the service for which the fee is imposed.” Revenues generated by permits are required by law to offset local expenses related to the new housing.
However, some of that “excess" permit revenue flowed into the city of Corcoran’s general fund that built a new city hall and financed other public expenses.
Rep. Jim Nash, R-Waconia, told The Center Square that many homeowners don’t question every line item because permit costs are only a fraction of the total house cost.
“There should be no such thing as excess permit revenue, or if there is, it should be overcharged by like $11, and no one would care,” Nash said. “But $3,000 over and above is egregious.”
Nash said that overcharging for permits raises home prices and repels growth.
“It’s not the sort of thing you’d put in your city’s welcome packet,” he said. “Welcome! We overcharge you by $3,000 because we had to build city hall. Have a great day.”
“Moreover, cities and towns often have a strong incentive to keep these costs opaque so that intra-city cost comparisons cannot be effectively made,” the study read.
Nash, who served as mayor of Waconia for four years, said the city should issue a refund immediately and initiate a plan to reimburse money already spent.
The study showed the biggest discrepancies between fees charged in some of the fastest-growing metro area suburbs of the Twin Cities.
Regulations hike new home prices up to 33 percent, the authors wrote.
“The report does not suggest that rules and ordinances are not appropriate. Rather, it shows how costly building regulations, and the choices they represent, are,” national economist Elliot Eisenberg said. “The results are clear and the belief that regulations don’t matter, or that builders and developers absorb regulatory costs is shown to be false.”
Variable permit costs and other regulations hiked the price of a new home in the Twin Cities by up to $47,000 compared to new homes in Hudson, Wisc., and up to $82,000 more compared to some Chicago suburbs.
Those upcharges shove many would-be homeowners out of the market; fewer than one-in-three of new Twin City homes cost less than $325,000, the report said.
This trend could span across Minnesota, but is unclear since about 200 cities failed to submit their annual reports to the state, required by law if that amount tops $5,000 in development fees.
Nash said that realtors had told him higher home prices discourage new home buyers.
"For every $1,000 increase in price of a home, generally speaking, you're removing 4,000 people as potential buyers," Nash said. In the case of Corcoran, if they overcharged by $4,000, that means they pushed 12,000 people out of the market."
Nash said these overcharges increase even more once they are absorbed into a home mortgage.
“Let’s say you get overcharged by $3,000 and you're going to roll that into a mortgage,” he said. “By the time that mortgage has been paid out, the fee will have been $6,000 because it doubles, and then on top of that, the evaluation of your home is increased by that same number. So you’re paying higher property taxes.”